Title: The Risk and Return of Human Capital Investments (2013)
Kristen Koerselman & Roope Uusitalo
This paper looks at investment in human capital and the level of risk involved. The aim of this paper is to show how moments in lifetime income can be estimated from a shorter panel. The paper uses a 22-year panel (based on Finnish registers). Some of the techniques used in this short paper are mean and variance in lifetime earnings and discounted means of lifetime earnings, for university graduates and vocational high school graduates.
Conclusions made in the paper are that education is a lifetime investment, which needs to be valuated over the entire working life. The paper also indicates that panel spanning working lives is not easily possible however if panel spanning between 10 – 20 years, there is data for this type of analysis. Other conclusions found is that lifetime incomes for vocational secondary graduates and compulsory school graduates displays little difference in incomes. While controlling for employment compulsory school graduates have higher discounted lifetime income.
Title: Simulating the Risk of Investment in Human Capital (2007)
Joop Hartog, Hans Van Ophem & Simona Maria Bajdechi
This paper assesses ex-ante risk with a simulation model that mimics the situation facing an individual about to decide on investment in education. The basic model being human capital investment models that compares two future earning streams. Risk is captured by the relative volatility of the two earning profiles, high school earnings or university.
The paper uses a model with a log linear effect of experience on earnings and a single lifetime earnings shock to allow for analytical solutions.
Conclusions found in terms of risk, investment in a college education is similar to investing in the stock market with a portfolio of some 30 randomly selected stocks. Distribution of the internal rate of return is skewed to the right with an elongated upper tail. Investment in human capital carries a substantial risk and, therefore risk aspects in human capital should be investigated futher.
Title: Industry-Specific Human Capital, Idiosyncratic Risk and the Cross –Section of Expected Stock Returns (2008)
This paper shows that industry specific human capital can impact portfolio choice and expected stock returns. The characteristics of human capital returns vary across industries. The effect on an investor’s non-tradable human capital on optimal stock portfolio depends on the industry they work.
In this paper the focus is mainly on human capital, which forms a non-negligible fraction of wealth for virtually all investors. The data used is from the Centre for Research in Security Prices (CRSP).
Conclusions drawn are that when non-tradable (industry-specific) human capital is excluded from the benchmark used to measure systematic risk, the resulting idiosyncratic risk affects the cross-section of expected results.